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Chicago Tribune Gail MarksJarvis column

Chicago Tribune (IL)

Aug. 04--In an effort to recruit employees in competitive fields and help motivate older workers to leave the workplace when they hit retirement age, companies are becoming more generous with their retirement savings plans.

After pulling back on the extras during the recession, companies are devoting more to 401(k) matches, the free money they give employees who participate in company retirement savings plans.

Including the money they put toward 401(k) matches and benefits such as profit sharing, the average company contributed 4.7 percent of each employee's salary toward retirement savings in 2016, according to a study by the Vanguard Group, a mutual fund company. That was a notable increase over 2015, when companies contributed only 3.9 percent of each employee's salary.

Despite the extra help, Americans in general are still far behind in saving what they need for retirement. About half don't have 401(k) plans, and even those who do often don't stash away enough. The Boston College Center for Retirement Research has estimated that almost half of Americans are not going to have enough savings in retirement to cover their needs.

To best position themselves for retirement, employees should save about 10 percent of their salary a year starting with their first job. If they wait until their 30s to start saving, putting away 12 to 15 percent a year is considered advisable.

It doesn't all have to come out of pocket, however, and that's where matching money from employers helps. For example, a person getting a 3 percent match could put away only 7 percent of hir or her salary and still fulfill the 10 percent savings goal.

According to the Vanguard study, about 97 percent of 401(k) participants get some matching money on the job. Over a lifetime of work, that can add hundreds of thousands of dollars to a person's retirement.

The most common match, according to Vanguard, is 3 percent of an employee's salary. To qualify for it, most employees would have to contribute 6 percent of pay to the workplace retirement plan. The employer would then match 50 cents of every dollar the employee stuffed into the 401(k).

Consider the impact: A 25-year-old earning $40,000 a year, who never gets a raise but does get a 3 percent match from an employer each year for 40 years, would end up with about $256,300 from the matching money alone. That assumes the money would be invested in a stock and bond mutual fund in the 401(k), earning an average of 7 percent a year.

Of course, the amount is likely to be more since people do tend to get raises. But assuming that same $40,000 in pay each year, a person saving a total of 10 percent a year -- combining their the worker's own contribution and free money from the employer -- could have about $854,400 for retirement.

According to the Vanguard study, half of people are saving about 10 percent or more with their employer's help now. The average amount individuals contribute themselves is 6.2 percent.

The 3 percent company match is the most common approach. The next most common approach is for employers to match every dollar an employee contributes up to 3 percent of a person's salary, and then do 50 cents on the dollar for the next 2 percent of pay, Vanguard found.

"These are the good guys," said Vanguard Center For Investor Research analyst Jean Young, referring to companies that offer 401(k)s and matching money.

Some may be trying to compete for employees. Others may be trying to motivate saving early enough in a person's work life so that people retire when they hit retirement age. Many, said Young, "want to set their employees on the right path."

Those offering the best matches tend to be large established companies that can devote the resources and those that have to compete to get top employees. Research by Aon Hewitt, a Chicago-based human resources consulting firm, shows that 53 percent of companies with between 1,000 and 4,999 employees are matching each dollar an employee puts into a 401(k), up to 6 percent of their salary.

Under that circumstance, the 25-year-old with the $40,000 salary would put away 6 percent; the employer would put away 6 percent, and by retirement the individual would have about $1 million.

While matches are improving, Young noted that's not the only reason companies seem more generous.

In the past many employees often failed to sign up for 401(k) plans, or they contributed so little that they didn't get all the free matching money to which they were entitled.

Consequently, during the last few years, it's become common for companies to simply enroll their employees in 401(k) plans rather than waiting for people to take action. In addition, companies have been nudging employees to save more by automatically deducting a little more of their pay for the 401(k) each year. As a result, employees are saving more without paying attention, and they are reaching the level of saving where they qualify for every penny of free money that their employers will give, Young said.

Often, the employer will start an employee off saving 3 percent of the worker's salary in the company 401(k). Then, each year, the employer will automatically raise the saving percentage a little, with the highest point sometimes 6 percent of pay and sometimes 10 percent.

A decade ago, companies were afraid to do this. They feared employees would balk, but that hasn't happened, Young said. In companies that are doing automatic enrollment, 90 percent of employees are participating in the 401(k) even though they have the option of leaving the program. Companies that aren't automatically putting employees into 401(k) plans have only a 63 percent participation rate.